Golden Headfakes

This note was originally published
at 8am on December 02, 2014 for Hedgeye subscribers.

“Money is gold, and nothing else.”

-J.P. Morgan

That was one of John Pierpont Morgan’s summary investment conclusions before he passed away in March of 1913.

Ironically enough, later that year, Carter Glass introduced modern day central planning of market expectations, currency manipulation, etc. to the US House of Representatives via the Federal Reserve Act.

By 1971, when US Dollar denominated money was fully politicized by Nixon (he outright abandoned the Gold Standard), J.P. must have been rolling in his grave…

Today, I’d say that money is whatever you think you have that can pay for things. In other words, if all your money was denominated in Bitcoins, Burning Yens, or Russian Rubles, you can pay for a lot less today than you could last year.

Money can often be an illusion of wealth, and nothing else.

Back to the Global Macro Grind…

What if all your money was in the Russell 2000 this year? That would suck. After doing literally nothing (flat for 4 straight weeks in November), the Russell #Bubble got pounded for a -1.7% loss yesterday, falling back to -0.9% for 2014 YTD.

Gold, on the other hand, had a big day, rallying +3.1%, inching its way back to +0.8% for 2014. And this came on a US Dollar DOWN day, which drove the machines squirrely.

*Squirrely (definition: to chase one, either proverbially in your head, or physically in the Yale Hockey House).

Here are the inverse correlations, across durations, between Gold and the US Dollar Index:

180-days = -0.90

120-days = -0.94

90-days = -0.96

In other words, for most of the time in the last 3-6 months, Gold has been the inverse of the US Dollar, and nothing else.

“So”, with the following moves across a crashing commodity complex yesterday:

Silver +6.1% to -15.0% YTD

Wheat +5.1% to +0.3% YTD

WTI Crude Oil +4.8% to -29.5% YTD

What do you do? Do you chase the squirrel? Do you fade? Or do you do nothing at all?

Most of the time, I like to analyze everything… and do nothing. It hasn’t always been this way for me (as a knuckle-head hockey player, I always thought I needed to do something!). But as I age, I’ve found that there is more money in waiting and watching.

After not chasing silver, wheat, or oil yesterday, and seeing today’s renewed selling in everything inflation expectations (commodities down), I’ll be considering the short side of Gold and Silver today.

While we can have a healthy debate about the definition of squirrel hunters or money, there is none to be had about the direction of trending prices – they are either inflating or deflating – and it’s our job to be on the right side of those trends.

As of this morning’s refreshed price, volume, and volatility data here are some bearish Hedgeye TRENDs I want to reiterate:

I know, I know… but the SP500 and Apple are up. And that’s just great – but it doesn’t change the fact that the stability of the macro market’s proverbial snow-pack is getting less stable by the day.

Exercising the same mountain of snow metaphor, if there is one factor forming within the layers of interconnected market risk that is signaling #avalanche right now … it’s #deflation.

In between now and mid-December you have two causal forces (Draghi/ECB perpetuating #deflation via devaluing the Euro and/or a Japanese snap election that will decide at what pace Abe/Kuroda can burn the Yen) that can drive #StrongDollar deflation.

If yesterday was simply a head-fake, and Dollar Up, Gold Down, Oil Down correlation risks take hold (again), the accumulation of #deflation risks will continue to rise. And neither Putin nor High-Yield Energy/Gold Bonds will sit on this mountain of risk idly.

Takeaway:We are once again officially bearish on the Japanese yen (FXY) and bullish on large-cap Japanese equities (DXJ).

Yesterday afternoon we held a flash conference call to discuss our revised outlook for Japan and the associated investment implications. Key topics included:

Where we stand vs. consensus on Abenomics: we think a re-test of ~147 on the USD/JPY cross is a probable occurrence over the intermediate term and we think that equates to roughly 50% upside in the Nikkei 225 from today’s closing price

Our intermediate-term outlook for Japanese monetary and fiscal policy: commensurate with this forecast, we think the BoJ will consistently surprise investors with the frequency and scope of further QQE expansion; fiscal policy is extremely supportive over the NTM

The elevated risk of a global deflationary spiral: in line with our extremely bearish bias on the Japanese yen, we believe #StrongDollar commodity deflation is set to continue weighing on reported inflation readings globally, underpinning expectations for looser G3 monetary policy, at the margins

Consistent with these views, we are once again officially bearish on the Japanese yen (FXY) and bullish on large-cap Japanese equities (DXJ).

The Russian circus and its related market and economic implications has been looming large on Hedgeye CEO Keith McCullough's radar screen lately. Here's a quick recap from just two weeks ago in his daily Top-3 things morning look.

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